Liquid Alternatives: Bobby Blue, Senior Manager Research Analyst, Morningstar, On The Rising Inflows Into Liquid Alts

September 2, 2022 | Liquid Alternatives, News
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VettaFi discusses liquid alternative trends with Bobby Blue.

As equities and bonds suffer in a challenging macroeconomic environment, liquid alternatives have made a comeback. Investors are plowing money into strategies such as managed futures, volatility, long-short equity, and more.

Since last year, as bonds and stocks stumbled, inflows have surged into liquid alternatives.

Liquid alts are mutual funds, closed-end funds, and ETFs that invest in alternative investment strategies offering downside protection and diversification opportunities while providing daily liquidity which makes them accessible to all investors. (VettaFi)

According to Bobby Blue, liquid alts were shunned by investors as stocks and bonds held sway on their minds.

“I think from a performance perspective, it was a bit of a lost decade for a lot of these strategies, not just trend, but most other liquid alt strategies too; long-short equity, market neutral, merger arbitrage,” Blue explained. “These strategies, when they’re working well, they’re diversifying away from equity and fixed income beta — and that was the story of the 2010s,” said Blue.

However, there has been a dramatic change in the environment following hardening interest rates and runaway inflation, that has wrong-footed stocks and bonds.

“Now that that sort of theme has broken down a little bit, you are seeing some of these strategies perform better in this new environment,” Blue said.

“Investors are seeing the diversification benefits that these strategies can add to a portfolio with nearly zero correlation to equity and fixed income markets for long periods of time and seeing that they can improve a portfolio’s risk-adjusted returns — in some cases the absolute level of returns — depending on how you’re allocating to them.”

“An investor looking for some sort of uncorrelated return stream… we would probably steer them towards an allocation to an opportunistic strategy like a systematic trend or global macro that have the ability to benefit when markets are going up,” Blue explained.

“When markets are down, they tend to have the lowest correlations to broader equity and fixed income markets; they’re that absolute return sleeve that can have the potential to generate performance in good times and bad.”

Related Story: “A Diverse Range Of Strategies That Can Zig When The Market Zags”

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